Asia | FX | Monetary Policy & Inflation
US efforts to promote greater transparency in exchange rate practices in Asia are slowly pushing regional central banks to disclose data. Singapore just announced FX intervention data for January-June of this year, marking only the second such release. And the numbers are striking. MAS purchased a net $44.4bn in FX through H1, equivalent to around 13.5% of projected 2020 $GDP. H2 2019 FX intervention released in April was $29.9bn, or 8% of last year’s full-year GDP. With a whopping $74bn in net FX purchases over the last 12 months, this puts MAS on track for around 23% of GDP in FX intervention this year.
The release comes ahead of the expected mid-October update of the US Treasury FX Manipulation Report. We do not expect the Treasury to label Singapore a currency manipulator because they meet just two, not three, of the required criteria on trade, current account and intervention (admittedly, China only met one criterion but still received the currency manipulation label in August 2019). And crucially, Singapore is the only country currently on the Treasury watchlist that does not meet the criterion of a $20bn trade surplus with the US. Prior to this year, Singapore ran trade deficits with the US. This has shifted with a $3.5bn surplus through January-July 2020. But this remains under the $20bn threshold and sharply contrasts Vietnam, which ran a $55bn trade surplus with the US last year and $35bn through July (Chart 1). China’s surplus with the US stands at $164bn through July and has been increasing this year despite the Phase 1 agreement.
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Summary
- Singapore’s $44bn in FX intervention in H1 is the highest on UST watchlist
- RBI FX reserves are up $72bn YTD given significant FX intervention
- The forthcoming US FX Manipulation Report will focus on Asia FX practices
- MAS FX policy is unlikely to change, but CBC and others may ease back on dollar purchases
Market Implications
- Medium-term: Positive; Asia FX – reduced intervention will allow greater exchange rate appreciation
US efforts to promote greater transparency in exchange rate practices in Asia are slowly pushing regional central banks to disclose data. Singapore just announced FX intervention data for January-June of this year, marking only the second such release. And the numbers are striking. MAS purchased a net $44.4bn in FX through H1, equivalent to around 13.5% of projected 2020 $GDP. H2 2019 FX intervention released in April was $29.9bn, or 8% of last year’s full-year GDP. With a whopping $74bn in net FX purchases over the last 12 months, this puts MAS on track for around 23% of GDP in FX intervention this year.
The release comes ahead of the expected mid-October update of the US Treasury FX Manipulation Report. We do not expect the Treasury to label Singapore a currency manipulator because they meet just two, not three, of the required criteria on trade, current account and intervention (admittedly, China only met one criterion but still received the currency manipulation label in August 2019). And crucially, Singapore is the only country currently on the Treasury watchlist that does not meet the criterion of a $20bn trade surplus with the US. Prior to this year, Singapore ran trade deficits with the US. This has shifted with a $3.5bn surplus through January-July 2020. But this remains under the $20bn threshold and sharply contrasts Vietnam, which ran a $55bn trade surplus with the US last year and $35bn through July (Chart 1). China’s surplus with the US stands at $164bn through July and has been increasing this year despite the Phase 1 agreement.
But Singapore’s 16% of GDP C/A surplus through Q2 2020 is the highest of all 10 countries currently on the monitoring list. And the H1 FX intervention data confirms its FX intervention is also the largest. We therefore expect the next Treasury report will reiterate the need for structural reforms to reduce Singapore’s very high savings rate.
MAS’s policy of targeting the S$NEER makes sense for a small and very open economy. But the same cannot be said for others in Asia. The RBI reported almost $26bn in dollar purchases through June and July. And given another $8bn in reserves accumulation in August, we expect this topped $30bn over the three-month period. Furthermore, the RBI’s FX reserves have increased by a large $72bn YTD. Taiwan’s central bank also intervenes in the FX market regularly (buying FX to weaken TWD during afternoon trading), but the use of swaps clouds the extent of its FX purchases. The CBC confirmed earlier this year that it had $99bn in FX swaps as of end-February, though the released net purchases are small. Reserves accumulation in China has also resumed recently, with a $56bn increase YTD. Korea, by contrast, announced a net $345mn in FX sales through Q2 following $5.85bn in FX sales in Q1.
MAS’s intervention disclosure is not immediately relevant to its own policy stance or monetary framework more generally. But it highlights the increasingly large FX intervention in Asia, which has implications for other currencies in the region. The CBC will be under increasing pressure to step up disclosures and may ease back on FX purchases to avoid further scrutiny. Vietnam and Thailand will also be in the spotlight. For the RBI, the challenges are mounting. Today’s planned MPC meeting was postponed due to the government’s failure to appoint three new MPC members. FX reserves have surged; yet with earlier equity inflows now turning, the RBI may resort to selling.
Caroline Grady is a Senior Researcher at Macro Hive. Formerly, she was a Senior EM Economist at Deutsche Bank and a Leader Writer at the Financial Times.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)